Discussion:Intentional Overpayment

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Discussion Forum Index --> Advanced Tax Questions --> Intentional Overpayment


Discussion Forum Index --> Tax Questions --> Intentional Overpayment

Ckenefick (talk|edits) said:

21 February 2013
Taxpayer's 2011 return was due 10/15/12. On 10/14/12 he learned it would be break even. He had not yet made any estimated tax payments for 2012. So he makes a $10k estimated tax payment for 2011 on 10/14/12, thereby creating a $10k overpayment on his 2011 federal return, which he elects to credit towards 2012.

On what date will IRS records show this 2011 overpayment as a 2012 credit?

JR1 (talk|edits) said:

February 21, 2013
Clever if that works.

Mhewes (talk|edits) said:

21 February 2013
This sounds like a trick question! An overpayment applied to a subsequent year is considered to be a payment of estimated taxes. The overpayment is applied to unpaid estimated tax payments in the order required to avoid underpayment penalties. So I'm going with April 15, 2012 is the earliest possible date the IRS would credit the tax, but may be later if the overpayment was not required to satisfy the first quarter payment.

Podolin (talk|edits) said:

22 February 2013
Same as any overpayment for 2011 applied to 2012. Sec 6401(c) [via Sec 36]. Same as Mhewes says above.

Mscash (talk|edits) said:

22 February 2013
The payment made 10/14/2011 is not an estimated tax payment. It's too late for that. He would get credit for the overpayment as of the IRS posting date.

Mhewes (talk|edits) said:

22 February 2013
This is why it's tricky. Then any estimated tax payment received after April 15th of the year following the year for which the estimate was intended would be in the same situation, even if the return hadn't been filed. I would love to know the answer to this question.

Ckenefick (talk|edits) said:

22 February 2013
See RR 99-40. But also read Bojan, who was a CPA.

Vetta (talk|edits) said:

23 February 2013
I'd say 10/14/12. I'm guessing you want to be able to say your client made (at least part) of his 2012 estimates timely?

Ckenefick (talk|edits) said:

23 February 2013
I didn't say the "taxpayer" was a client. I made the whole thing up. Thought it would be fun. We actually batted it around before:

http://www.taxalmanac.org/index.php/Discussion:Underpayment_penalty_questions

I think the real question is: Does the IRS' system adequately catch these things and post them to the right period?

My experience is "no."

Southparkcpa (talk|edits) said:

23 February 2013
Sounds like a divorcing spouse pays 100K on a 1040ES to hide assets...

saw that once.

Podolin (talk|edits) said:

23 February 2013
Thought it would be fun. I thought unwritten rule was to save the hypotheticals until after 4/15. But since this one is started, consider this. Poorly advised or noncompliant "Taxpayer" pays no ES payments in 2011. He does not extend 2011 on 4/15/12 (or whatever the due date was). But he is pretty sure he will owe big tax amount ($100k) for 2011, so he decides to file a 2011 ES form on 8/15/12 with payment of $150k. He files 1040 for 2011 on 10/15/12 (having never asked for an extension). Return shows tax of $100k and ES payment of $150k, and says to credit the overpayment to 2012. When does his 2011 ES penalty stop running? When must he pay it? When is 2011 overpayment credited to 2012 ES? Does IRS take 2011 interest and late filing penalty out of the overpayment?

Ckenefick (talk|edits) said:

23 February 2013
Check out the RR and the case. The case involved a guy, Bojan, who made estimates for 1982. He didn't timely file his 1982 return, but it reflected an overpayment. He filed the 1982 return in 1986. On his 1982 return, as filed in 1986, he applied the overpayment to his 1983 'estimated tax' obligation. In essence, he tried to make a retroactive election with respect to the application of the 1982 overpayment.

The IRS and court agreed that it was too late to make an estimated tax payment for 1983, because in 1986, the 1983 tax was no longer an 'estimated tax' (the final 1983 estimate was due 4/15/84 and this date had already passed). That is, whatever that 1983 tax was, it was an actual tax (a/k/a 'outstanding tax'), although unassessed. As such, Bojan loses. Bojan's 1982 overpayment credit was treated as payment against his 1983 'actual'/'outstanding' tax liability, not as a payment against an estimated tax liability.

What is interesting about this case is that the 1982 overpayment was the result of timely 1982 estimated tax payments/withholdings. As such, the overpayment was not the result of any funny business wherein all or part of the 1982 overpayment was due to estimates/extension payments made after 4/15/1983 (the original due date of taxpayer's 1982 return). In other words, Bojan had an honest-to-goodness overpayment on his 1982 return resulting from timely payments.

So, I suppose we could call this RULE #1: An overpayment from Year1 cannot be credited to Year2 if the Year1 return is filed after the final estimated tax due date for Year2 (which would be 4/15/Year3). Again, this is because come 4/15/Year3, Year2's tax is no longer estimated, but is 'outstanding.'

...what about RULE #2 and maybe RULE #3...

Death&Taxes (talk|edits) said:

23 February 2013
I found the case interesting, also. I've had clients in similar situations to Bojan ask me if the overpayment can be applied to the next year when they are beyond date for paying estimates. I must have tried it once or twice because I tell them that IRS will ignore our plea and refund the money, which means in the year that follows there may be late filing penalties, late payment and estimated tax penalties. The client wants to argue them because had IRS applied the payment, they might not have been assessed, or been substantially lower. No one ever listened to that argument.

Podolin (talk|edits) said:

23 February 2013
Note also that there is a slight inconsistency, in that, once the "final" ES date (1/15 of the following year) has passed, it was an actual tax (a/k/a 'outstanding tax'), although unassessed. Yet, for the first 3 quarters, taxpayer can miss the due date of the payments and still stop the running of the ES penalty by paying late. I wonder if there is ANY leeway at all on the 4th quarter, such that a payment of an ES on, say, 1/20, would count as an ES payment?

Spell Czech (talk|edits) said:

23 February 2013
"...such that a payment of an ES on, say, 1/20, would count as an ES payment?"

Absolutely. The payment on January 20 reduces the unpaid estimated tax and thereby reduces the penalty as of January 20. We've all gotten so wound up in this discussion that we've temporarily forgotten the basics. Form 2210 has a lot of mechanical things built right into it. We *used to* do them by hand... Counting the days on our fingers... Back in the old days... When things were simpler... When we had hair and abs... Is it ever coming back? Don't answer that.

Ckenefick (talk|edits) said:

23 February 2013
Lenny, what you're describing wouldn't fall within the purview of Bojan or RULE #1. The reason late 1Q, 2Q and 3Q payments stop the running of the ES penalty is because the quarterly underpayments accumulate until satisfied in whole or in part. So, come 1/15/Year2 (the deadline for making the final ES payment for Year1), the underpayment penalty has already been fixed.

But do note that there is a true inconsistency with amended returns. If you file an amended return within the SOL, you can still apply an overpayment to "next" year's estimated tax. Bojan made this argument, but the court said, "Your return wasn't an amended return, so those provisions don't apply. Sorry."

Spell Czech (talk|edits) said:

23 February 2013
Have you guys not had your coffee yet?

The "window" for ES payments is open until April 15th; there's nothing special or cut-off or do-or-die or don't-bother-anymore about *January* 15th. Yes, it's when the fourth quarterly installment of estimated tax payments is due, but the penalty calculation runs until April, and payments made in February, March, and the first two weeks of April *clearly* are fully qualified estimated tax payments ! Put them into your software, change the dates on the payments, if necessary, and watch what happens to the penalty. Coffee, anyone?

Ckenefick (talk|edits) said:

23 February 2013
Okay, call it 4/15/Year2...it doesn't matter. Lenny's point is not covered by Bojan.

But you're right...from Bojan:

Here, the estimated tax penalty assessed against the plaintiffs arose on account of their failure to make estimated tax payments prior to April 15, 1984, against their 1983 tax liability

...so I will edit my lengthy post above and switch 1/15 to 4/15 (not that it mattered in Bojan).

Spell Czech (talk|edits) said:

23 February 2013
Would someone do the cripples here a favor and link us to Bojan, please?

Ckenefick (talk|edits) said:

23 February 2013
I can't find it online, I tried.

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